Download ECN3184 Econometric Methods (3 Credits) Section

by Gerald Pech
29 September 2014
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Leadership is great in business
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The leader gets rewarded and society benefits from
their innovative contributions
So does leadership also help in tackling climate
change?
Here things are more protracted
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Is There a Role for Leadership in Mitigating
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Leadership in international negotiations
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Leadership at the national level
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here the leader does not necessarily gain the most
from being leader
and it is unclear whether leadership greatly changes
the outcome
here leadership would be particularly helpful but
leaders are not particularly encouraged to lead
Leadership in business
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here some incentives seem to work in the right
direction, but not a central role for tackling climate
change
Is There a Role for Leadership in Mitigating
Climate Change?
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1 The Economics of Climate Change
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2 Leadership
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a. Costs and Benefits of Mitigating Climate Change
b. The 2C-Target: Implications for Kazakhstan
c. Benefits from Cooperation
a. Leadership in International Cooperation
b. Leadership at National Level
c. Leadership in Business
3 Final Thoughts
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Temperature ranges as scientists tell us
There is risk of “catastrophic climate change”
The economist computes “output loss” at
different temperature levels
Figuring out impact on different industry
sectors
agriculture and fisheries as the main losers
 coastal real estate another
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and extrapolating share of industries in future
economic output
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damage in % of output
DICE model
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IPCC estimate
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0
1
2
3
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source: Nordhaus (2013)
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global mean temperature
increase oC
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only market or near-market sectors
loss of species (-)
greater risk of natural disasters (-)
health effects (-)
accessibility of artic sea routes (+)
Difficult to quantify
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Some measures would not cost anything but
rather save costs
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improved home insulation, energy saving light bulbs
15% of CO2 emissions in US fall in this category
Increasing energy efficiency of household
appliances, power generation, transport
Rebalancing energy mix
Offset projects
Carbon capture
Post-combustion removal from atmosphere
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Cancun agreement (United Nations Climate
Change Conference 2010) says: 2 C above preindustrial level
Is it “optimal”?
Probably not too far off the mark
If it would be done in an economically efficient
way, limiting the temperature rise to 2.3 C
would be optimal, says Nordhaus
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But if countries incur unnecessary costs it might be
reasonable to allow more, say 4 C
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Two thirds of already discovered carbon assets
could not be commercialized before 2050
(World Energy Outlook 2012)
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or carbon capture technology used at implausible
level
to have a 50% of meeting the target
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which would require a limit of 450 parts of CO2
equivalent per million particles in the atmosphere –
hence “450 scenario”
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Production of fuels has to become more energy
efficient – some of this might result in cutting
costs, but overall producing fuels will become
more costly
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avoiding flaring gas from oil drilling sites, oil tar
sands of Canada, carbon pricing (?)
Demand will be directed towards less carbon
intensive energy sources
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demand for carbon fuels will decrease
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150$
135$
50$
85 mio barrels a day
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As demand for carbon fuels decrease
Prices for carbon fuels will come down
Making the most costly kinds of crude
uneconomical
But Kashagan should be ok
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source: World Energy Outlook 2012
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Different countries have different “marginal
abatement costs”
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Depending on how much mitigation efforts they
already have undertaken
A small group of countries would find it
infeasible to cut emissions sufficiently to have a
global impact
Yet the economics of international cooperation
have some strange properties
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Everyone can be made better off if they all join
in the effort to mitigate
But for each country it is tempting to take the
“free rider position”
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Similar to the well-known “prisoners’ dilemma”
That only some countries cooperate and others
stay on the sidelines may be a stable outcome
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the threat of stopping to cooperate does not work
stronger medicine is needed to encourage
widespread participation
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from Finus/van Ierland/Dellink (EG 2006)
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Does president Obama’s use of administrative
powers to cut carbon emissions encourage
Chinese reciprocity?
China has recently taken action against the
emissions
But mainly because citizens complain about
local impact of emissions
At the international level, Obama’s action may
just make it less likely that China moves
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Kyoto, negotiated 1997, in force 2005-2012
Of the main emitters, only EU, Japan and
Eastern European transition economies have
joined
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Kazakhstan ratified in 2009
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Even when countries join, there is no guarantee
that they keep their pledges
Signatories miss out on their targets:
EC target: - 8% on base year 1990
 compliance gap in 2007: 6.5%
 Canada target: -6 %
 compliance gap: 31.1 %
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Punishment for countries which do not join or
which do join but renege on their pledges
Could take form of a “carbon tariff” on imports
from those countries which might be
acceptable under WTO rules
If a country allows unrestricted emissions this might
be considered a “price dumping policy” under WTO
rules and entitle others to retaliate
 As of yet untested!
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But WTO itself has looked more febrile recently
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President Obama’s use of administrative
powers to cut carbon emissions certainly
moved the US in the “right” direction
There has been the argument that many
countries would benefit from reducing carbon
dioxide emissions
by reducing local environmental effects and
earning tax revenue
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Highest emissions of CO2 per capita in Europe
and Central Asia
Still heavily subsidizes (in the end
consumption of) carbon fuels
Yet started to introduce a market for trading
carbon emission allowances
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and requires all companies with more than 20,000 t
CO2 equivalent emissions in 2012 to use allowances
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Politicians are probably interested in political
costs (of emission abatement) rather than
economic costs
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Voters whose livelihoods are directly threatened by
mitigation efforts (oil workers in Oklahoma) are
vocal and effective opposition
“Under my administration, America is producing
more oil today than at any time in the last eight
years.” (Obama, cit. in McKibbins, 2014)
Is there a “grand bargain” at national level?
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Easier in post-industrial societies and easier in
Europe than the US
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As target of government regulation
or as potential target of regulation
incentive to pre-empt government action by
announcing voluntary measures
 but also make adjustments to expected future
government policies
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As competitor for costumers and employees
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both tend to value a company’s reputation for
“environmentally responsible behavior”
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A reputation for ecologically and socially
responsible behaviour is vital for an employer
to attract graduates
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for 15% of German college graduates it is the most
decisive factor in their choice of employer
for 67% it is one decisive factor
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Sir Richard Branson of Virgin Airlines and his
pledge to make 10 bn available for research
But other companies made pledges at last
week’s UN event
Incentives work in the right direction:
If your competitor makes a pledge, it increases
incentives for you to make a pledge
So this is an example where leadership works
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Whilst leadership in business clearly has the
effect of motivating followers to make pledges
voluntary contributions are unlikely to solve
the problem on their own
Companies are only “indirectly” motivated
and keeping pledges is a different matter
In the end, tackling climate change is the job of
governments, not private businesses
There, national leadership would be helpful
But international leadership has its limits
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Nordhaus, D., The Climate Casino, Yale UP 2013
Klein, Naomi, This Changes Everything
Krugman, P., Gambling with Civilization, NY
Review of Books 7 November 2013 Link
McKibben, B., Will We Lose the End Game, NY
Review of Books 10 July 2014 Link
IPCC website Link
IEA, World Energy Outlook, 2012 Link
OECD, Energy Subsidies and Climate Change in
Kazakhstan, ENV/EPOC/EAP(2013)7 Link
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